Price Risk Report - 1 October 2018

Last Month Summary

UK gas and electricity prices rose during September. Gas prices ended the month 6.8% higher at 2.39 p/kWh as colder temperatures and lower pipeline supplies left the UK gas system undersupplied. September’s schedule of heavy North Sea gas maintenance also highlighted supply risks as the UK took delivery of just one LNG over the entire month.

Extended French nuclear outages also raised concerns that Britain’s cross-channel neighbors would have less excess electricity to supply via sub-sea interconnectors. boosted the demand for gas. As such, electricity prices rose 2.8% to 6.56 p/kWh.

Brent crude oil prices rose 5.3% to $81.72/bbl, Saudi Arabia confirmed it was comfortable with rising oil prices in the short term as the market adjusts to the start of U.S. sanctions on Iran. Iran’s crude oil exports are expected to drop by more than 2 million bpd in November (from 3.1 million in April) due to sanctions imposed by the United States.

Energy Price Outlook

Bearish price drivers   Bullish price drivers
Ø If mild temperatures across North West Europe.  continue through September and into the winter months, power demand for heating could be lower than normal for this time of year   Ø Unexpected pipeline gas or nuclear outages, could both harm Britain’s ability to meet power demand during times of peak UK gas and power consumption.

Ø Lower gas inventories across Northwest Europe mean demand from injections into storage facilities during summer months is forecast to be higher than during previous years.

Ø Carbon prices have soared above €21/tCO2,. With recent forecasts predicting prices will reach €25/tCO2 by the end of 2018, this could push UK gas and power markets higher.

 

Recommendations: With the seasonal Winter 2018/19 contracts for gas and electricity having delivered on 1 Oct we turn our attention to contracts renewing in 2019. Wholesale prices remain high, however the combination of multiple supply risks means that markets could experience further volatility during Britain’s coldest months. Much will depend on winter temperatures, which are very difficult to predict.

Current supply and demand risks remain extremely unpredictable. As a result, energy users with contracts renewing before the end of March may want to consider securing their contracts immediately. While a mild winter may see prices dip next year, the rising EU carbon market and unscheduled supply disruptions means that UK electricity and gas prices are still at risk of rising higher ahead of the April 2019.

Beond Rolling Annual Indices since Jan-07

Beond Price Risk Report 1 October 2018
Source: Beond Analysis, Reuters

2018 UK’s second greenest summer on record despite lower wind production

Following 2017’s “greenest summer ever” for electricity generation, thanks to a growing number of windfarms and solar installations edging out coal and gas power stations, 2018 has seen a comparatively dirty summer for power generation, due to the weather’s impact on renewables. The Met Office said the high pressure that caused much of the country to bask under sunny skies had suppressed windy conditions. The wind drought meant that at times turbine blades sat idle for days. Windfarm capacity is up by more than 10% since a year ago, but the share of electricity they supplied dropped from 12.9% last year to 10.4% this summer, according to official National Grid data.

Oil tops $81/bbl as markets adjusts to U.S. sanction against Iran’s oil exports

Brent crude oil prices rose 5.3% to $81.72/bbl, as OPEC’s de facto leader Saudi Arabia confirmed it was comfortable with rising oil prices in the short term as the market adjusts to the start of U.S. sanctions on Iran. Iran’s crude oil exports are expected to drop by more than 2 million bpd in November (from 3.1 million in April) due to sanctions imposed by the United States.

Venezuela’s ongoing supply issues caused by the country’s economic troubles, combined with strong global oil demand from China and India, are also supporting higher prices.

Pound stronger during September after breakthroughs in Brexit negotiations

The Pound Sterling was stronger over the last month as the European Union’s chief Brexit negotiator Michel Barnier said a deal with the UK was possible before the start of November if both sides are realistic. Barnier’s comments come amid unconfirmed reports a one-off summit of EU leaders could be convened in the middle of November to sign off the agreement.

Meanwhile, the Bank of England left interest rates unchanged at 0.75% at their September policy meeting while communicating that Q3-2018 economic and pay growth might have been stronger than originally envisioned.

Markets react after U.S. imposes 10% tariff on Chinese imports

Global markets were concerned about the recent escalation in the U.S.-China trade war, after U.S. called for a 10% tariff on $200bn worth of imports. Beijing quickly vowed to retaliate by extending tariffs on the US that already cover $110bn worth of goods. The rising trade war could threaten economic growth, which could in turn dent long-term demand for oil.

European Commission ditches tariffs on Chinese solar imports

The European Commission has decided to lift controls on Chinese solar panels entering the EU market in a move likely to see the availability of lower cost panels improve across the bloc. Tariffs of up to 64.9% were imposed by the EU on Chinese solar goods in 2013 in response to fears EU solar manufacturers were struggling to compete with Chinese firms that had allegedly benefitted from unfair levels of state support. However, developers and installers argued the measures increased the cost of buying and installing solar equipment across Europe, slowing the bloc’s transition to a low carbon electricity system. The EU’s decision to scrap solar tariffs was made in the “best interest of the EU as a whole”, with experts predicted scrapping tariffs will allow solar power in the EU region to become 30% cheaper by 2030.

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Disclaimer: These views and recommendations are offered for your consideration and Beond makes every effort to ensure that the data and information in this report is accurate.   However, due to the volatile and unpredictable nature of the energy markets, Beond cannot guarantee the accuracy of both the information and the recommendations provided.  Beond does not accept any responsibility for errors or misstatements, or for any direct, indirect, consequential or other loss arising from any use of this information and/or further communication in relation to this information.